Ovintiv Inc. 2022 Q3 Form 10-Q Summary
Business Context and Reporting Period
Ovintiv is a North American energy producer focused on the exploration, development, production and marketing of oil, NGLs and natural gas in the United States and Canada. The unaudited report covers the three and nine months ended September 30, 2022, filed November 8, 2022. Core assets were the Permian and Anadarko in the United States and Montney in Canada. Amounts are in U.S. dollars unless otherwise stated.
Key Financial Metrics
| Metric | Three Months 2022 | Three Months 2021 | Nine Months 2022 | Nine Months 2021 |
|---|---|---|---|---|
| Total revenues | $3,549 million | $1,789 million | $9,252 million | $5,319 million |
| Operating income | $1,373 million | $0 million | $2,689 million | $74 million |
| Net earnings | $1,186 million | $(72) million | $2,302 million | $32 million |
| Diluted earnings per share | $4.63 | $(0.28) | $8.84 | $0.12 |
| Cash from operating activities | $962 million | $812 million | $2,991 million | $2,389 million |
| Non-GAAP cash flow | $948 million | $845 million | $3,215 million | $2,468 million |
| Capital expenditures | $511 million | $365 million | $1,473 million | $1,098 million |
Calculated operating margins were approximately 38.7% for the quarter and 29.1% for the nine-month period, compared with approximately 0% and 1.4%, respectively, in the prior-year periods. Net margins were approximately 33.4% and 24.9%, compared with negative 4.0% and 0.6%, respectively.
- Product and service revenues increased 34% in the quarter and 49% year to date, principally from higher realized oil, NGL and natural gas prices.
- Realized commodity price losses were $821 million in the quarter and $2,075 million year to date. Including unrealized changes, net risk-management losses were $111 million and $1,864 million, respectively.
- Production averaged 516.3 MBOE/d in the quarter and 505.5 MBOE/d year to date. Liquids represented 52% and 51% of total production, respectively.
- Non-GAAP cash flow margin was $19.96 per BOE in the quarter and $23.30 per BOE year to date, versus $17.17 and $16.66 in the comparable 2021 periods.
- Total Costs, a non-GAAP measure, were $17.16 per BOE in the quarter and $16.45 per BOE year to date, versus $13.03 and $12.97 in 2021.
Liquidity, Debt and Capital Allocation
- September 30 cash and cash equivalents were $18 million, compared with $195 million at December 31, 2021.
- Total liquidity was approximately $3.4 billion, consisting of $3.5 billion of available committed credit facilities, $296 million of available uncommitted demand lines and cash, net of $440 million of commercial paper outstanding.
- Total debt was $3,618 million, down from $4,786 million at December 31, 2021. Debt included $440 million of current borrowings and $3,178 million of long-term debt.
- Ovintiv redeemed $1.0 billion of 5.625% senior notes due 2024 and repurchased approximately $565 million of senior-note principal in the first nine months. These actions are expected to reduce annualized interest expense by approximately $88 million in aggregate, before related effects.
- Net Debt to Adjusted EBITDA was 0.9 times, compared with 1.4 times at December 31, 2021. Debt to adjusted capitalization was 20%, below the 60% credit-facility covenant threshold.
- The company repurchased 11.2 million common shares for $531 million in the first nine months, including 6.7 million shares for $325 million in the third quarter. It paid dividends of $178 million year to date, or $0.70 per share.
Material Changes Versus the Prior Comparable Period
- Higher benchmark prices drove substantial revenue and earnings growth. Nine-month average realized prices increased 57% for oil, 49% for plant condensate, 43% for other NGLs and 89% for natural gas.
- Production declined year over year: total production fell 3% in the quarter and 7% year to date, while total oil and NGL production declined 3% and 7%, respectively.
- Operating costs increased. Nine-month Total Costs rose $354 million, or $3.48 per BOE, primarily from higher transportation and processing costs, inflationary operating expenses, discretionary workovers and production taxes.
- Capital expenditures increased $375 million year to date, reflecting higher activity, project timing and inflation. Approximately 79% of year-to-date capital investment was directed to Core Assets.
- Shareholders’ equity increased to $6,550 million from $5,074 million despite share repurchases, primarily reflecting 2022 earnings.
- The effective tax rate was 6.0% for the first nine months of 2022 versus 122.4% in 2021. The comparison was affected by prior-year tax-item resolutions and changes in valuation allowances.
Guidance, Outlook, Risks and Unusual Items
- In November 2022, Ovintiv updated full-year 2022 capital investment guidance to approximately $1.8 billion, funded with cash from operations.
- Updated full-year production guidance was 505.0 to 515.0 MBOE/d, including approximately 174.0 to 176.0 Mbbls/d of oil and plant condensate, 84.0 to 86.0 Mbbls/d of other NGLs and 1,480 to 1,510 MMcf/d of natural gas.
- Full-year Total Costs guidance remained $16.35 to $16.60 per BOE, based on assumed WTI of $94 per barrel and NYMEX natural gas of $7.00 per MMBtu. Third-quarter costs exceeded quarterly guidance because of higher electricity prices and discretionary workovers.
- For the remainder of 2022, Ovintiv had hedged approximately 80.0 Mbbls/d of expected oil and condensate production and 1,305 MMcf/d of expected natural gas production.
- Key exposures include volatile oil, NGL and natural gas prices, basis differentials, inflation, geopolitical conditions, weather, transportation and processing capacity, counterparty credit, foreign exchange, interest rates, environmental and climate regulation, operational hazards, cybersecurity and litigation.
- Derivative positions had a net fair value liability of approximately $540 million at September 30, 2022. A 10% commodity-price increase would have reduced the fair value of risk-management positions by approximately $78 million for crude oil and $77 million for natural gas, based on the filing’s sensitivity analysis.
- Ovintiv reported an estimated maximum exposure of $1.468 billion related to long-term gathering and processing arrangements with Veresen Midstream Limited Partnership. The potential payout is highly uncertain and depends on future production, development pace and third-party capacity utilization.
- Transportation and processing commitments totaled approximately $5.150 billion on an undiscounted basis, with total disclosed commitments of $5.365 billion. Management stated that existing legal matters were not expected to have a material adverse effect, although outcomes remain uncertain.
- The company stated that there were no material changes to the risk factors disclosed in its 2021 Form 10-K. Disclosure controls were effective as of September 30, 2022.
Important Facts for Investors to Verify
- Reconcile reported earnings and cash flow with the substantial realized and unrealized derivative losses, particularly the $2.075 billion year-to-date realized risk-management loss.
- Assess sensitivity of future cash flow to commodity prices, hedging levels, basis differentials and the company’s updated price assumptions.
- Verify the sustainability of production guidance despite year-over-year production declines and the planned capital-spending profile.
- Review the composition, maturities and variable-rate exposure of the $3.618 billion debt balance, including $440 million of commercial paper.
- Evaluate whether inflationary transportation, processing, operating and workover costs remain within the $16.35 to $16.60 per BOE full-year guidance range.
- Review the $1.468 billion maximum exposure associated with Veresen Midstream commitments and the $5.365 billion of disclosed contractual commitments.
- Confirm the continuation and funding of share repurchases, dividends and debt reduction under changing commodity-price conditions.